Mumbai University > Information Technology > Sem 7 > E–Commerce & E-Business

Marks: 10 M

Year: Dec 2014

Figure 2.1: Disintermediation of a consumer distribution channel showing a) the original situation b) disintermediation omitting the wholesaler and c) disintermediation omitting both wholesaler and retailer

1.Introduction:

i. Channel structure defines the way a manufacturer or selling organization delivers products and services to its customers.

ii. The distribution channel will consist of one or more intermediaries such as wholesalers and retailers.

2.Disintermediation:

i. The relationship between a company and its channel partners is shown in the above figure. This relationship can be dramatically altered by the opportunities afforded by the internet. This occurs because the Internet offers a means of bypassing some of the channel partners. This process is known as “disintermediation” or “cutting of the middleman”.

ii. The above diagram is a graphical form for a simplified retail channel.

iii. Fig a shows the former position where a company marketed and sold its products by pushing them through sales channel.

iv. Fig b and c shows two different types of disintermediation in which the wholesaler (b) or the wholesaler and retailer (c) are bypassed, allowing the producer to sell and promote direct to the consumer.

v. The benefits of disintermediation to the producer are clear-it is able to remove the sales and infrastructure cost of selling through the channel.

vi. Example: Notable examples of disintermediation include Dell and Apple, which sell many of their systems direct to the consumer—thus bypassing traditional retail chains, having succeeded in creating brands well recognized by customers, profitable and with continuous growth.

3.Reintermediation:

i. Reintermediation can be defined as the reintroduction of an intermediary between end users (consumers) and a producer. This term applies especially to instances in which disintermediation has occurred first.

ii. At the start of the Internet revolution, electronic commerce was seen as a tool of disintermediation for cutting operating costs. The concept was that by allowing consumers to purchase products directly from producers via the Internet, the product delivery chain would be drastically shortened, thereby "disintermediating" the standard supply model middlemen. However, what largely happened was that new intermediaries appeared in the digital landscape (e.g., Amazon.com and eBay)

iii. Reintermediation occurred due to many new problems associated with the e-commerce disintermediation concept, largely centered on the issues associated with the direct-to-consumers model.

iv. The high cost of shipping many small orders, massive customer service issues, and confronting the wrath of disintermediated retailers and supply channel partners all presented real obstacles.

v. Huge resources are required to accommodate presales and post sales issues of individual consumers. Before disintermediation, supply chain middlemen acted as salespeople for the producers. Without them, the producer itself would have to handle procuring those customers. Selling online has its own associated costs: developing quality websites, maintaining product information, and marketing expenses all add up. Finally, limiting a product's availability to Internet channels forces the producer to compete with the rest of the Internet for customers' attention, a space that is becoming increasingly crowded over time.

Implications:

1. Disintermediation and reintermediation have a significant impact on business organizations such as travel agencies, which exist primarily as intermediaries between suppliers of travel services.
2. E.g. The role of travel agencies is to provide customers with not physical products but with information. Due to the huge widespread of the internet, many airlines and other travel companies have started to sell directly to passengers.
3. As a result of this, airlines no longer need to pay commission to travel agencies for tickets which have been booked through them. This has disintermediated several travel agencies and they have now resorted to charging fees for their services and broadening the scope of services.
4. Travel agencies must understand these changes and adapt their business way of thinking to the needs of tomorrow’s travellers. Airlines provide customers with the service of booking and planning their travel through their websites, however, they are not as informative and global as intermediaries.
5. Therefore they do not offer consumers the convenience for a complete travel package that can be booked online. Re intermediation of services in the travel industry have been made possible by the expansion of business-to-business information exchange via the internet and enabling value added networks to deliver convenience and efficient service to the end user. Thus,
6. Agencies have a higher degree of independence than airlines would prefer, leading them to serve the interests of customers, or their own interests, rather than the interests of those whose products they are distributing
7. Agencies and retailers have increasing power as the information control point in the distribution channel.